Bankruptcies are rarely a lender’s friend. They’re a worst case scenario that often means a best outcome of pennies returned on the dollars of investment. Midway Games' (MWY) ongoing bankruptcy process has been a demonstration in point. Triggered by debt covenants and a sketchy transaction, the proceedings have been riddled with confrontational debate. The rancor’s even spilled over into a counter suit.

Monday, creditors filed suit against the company’s board members, former majority owner, Sumner Redstone, and the buyer of Redstone’s shares, Mark Thomas. The creditors are charging Redstone with fraudulent transfer, and accusing him and others of breaching their fiduciary duties.

A talented staff can be a company’s greatest asset but in tough times it can also be a significant liability. It comes down to motivation and retention. Can employees be kept happy and on the job or will they flee to a more stable, more certain work environment if possible?

Midway Games (MWY), which is struggling to survive a bankruptcy restructuring, is facing these very issues and the prognosis is not great, so far.

Monday, several stories seizing on a blog post from Gawker Media’s Kotaku suggested struggling Midway Games (MWY) might be in the process of selling off its Mortal Kombat game franchise. Several of the articles (on the basis of part of the story, as well) also went so far as to attack the company for pursuing a key-personnel incentive plan at the same time the bankrupt company appears to be cutting back payouts to laid-off staff.

The stories paint a grim picture of the company’s practices and it’s easy to join the chorus of castigation. Unfortunately, headlines sometimes oversell their news story and news stories sometimes under-emphasize all of the facts. Here, however questionable some of what’s happening at Midway may (or may not ) be, review of the company’s bankruptcy filings, which are embedded or linked below, shows the situation is more complicated and far less definitive than many of the reports suggested.

Over the concerns of some lenders, Tuesday Midway Games got a green light from the US Bankruptcy Court for the District of Delaware to continue to run its U.S. operations as usual as it moves forward.

The authorization for the “first day motions” will allow the company to press ahead with the bankruptcy filing Midway completed last week (The complete filing is available here). Payroll, price protection mechanisms and Market Development Fund obligations will be paid from the company’s cash position.

Midway Games (MWY) fought the good fight, twice extending debt repayment deadlines, but ultimately extensions weren’t a solution. With time again running out, today the company gave in and sought the protection of Chapter 11 bankruptcy. (The full court document is embedded below)

Midway had been under the gun since December when then majority shareholder Sumner Redstone sold off his 87.2% stake in the company. Redstone’s firesale triggered early debt repayment clauses that put Midway on the hook for settlement of more than $150m in outstanding notes that otherwise wouldn’t have been due before 2025.

Much is relative. Last week was bad for Circuit City; on a comparative scale, not so much for gamer Midway Games (MWY). Despite the crippling pressure of massive lingering debt potentially due ahead of its time, the company managed to do what the big retailer that sold their games couldn’t: buy more time.

Triggered by “change of control provisions” put into play when majority shareholder Sumner Redstone liquidated his position, Midway’s been facing down the prospect of Noteholder repurchase rights that, if exercised, could easily bankrupt the company.

Just in time for the New Year, Midway Games (MWY) got a stay of execution. SEC filings discovered this week indicate the company was able to extend its rapidly approaching debt redemption obligations in order to buy more time for renegotiation.

According to the filing, an agreement signed December 30th gives the company until February 19th before some of its noteholders can exercise redemption rights.

Despite sickness in the economy and in individual companies in the sector like EA (ERTS) and Midway (MWY) (more here), the broader video game industry’s retail heartbeat is pulsing strong and steady. For the second month in a row, NPD Group’s retail survey shows above average health.

Year over year, total sales for November were up 10% to $2.91b. Hardware and software categories saw near equal growth with software up 11% and hardware up 10%.

Last week, Sumner Redstone sold his majority stake in Midway Games (MWY) at a substantial loss. He took $100,000 and the assumption of debt in trade for an investment he spent more than $500m accumulating. The decision, many believe, was made in part to help with ongoing negotiations to restructure an $800m loan held by his National Amusements company. Turns out, however, his sales decision may force Midway’s management to renegotiate some debt of their own too.

The Chicago area game company is currently carrying more than $150m in senior convertible debt due in 2025 and 2026. The contractual agreements for these loans, according to SEC filings, included repurchase obligations that are triggered by a material change of control. Redstone’s sale of his 87% stake is just such an event.

Sumner Redstone has often shown a deft hand in his media investments. Gaming just hasn’t been his thing. Through 2005, he acquired about 87% of Chicago area gamer, Midway (MWY). The average purchase price was probably close to $8 a share but, over several years of buying, he paid as much as $20 to $24 a share. In the time since, the company has failed to perform or thrive.

In the quarter ended Sept 30, Midway reported a $76 million loss on revenues of just $36.7 million. Friday, the stock finished at just 38 cents a share. With other issues lingering, Redstone hit the eject button. On Friday, he reached an agreement to divest his stake entirely – at a fire sale price.

• Strong start for holiday sales, sort of. The holiday shopping season got off to a surprisingly solid start, with Black Friday sales up 7.2% (or 3% or 11%) from a year ago. There were, however, clear signs that strong sales were largely driven by 'door busters': First, Friday's momentum ebbed on Saturday. Second, as many as 70% of shoppers were purchasing only 'deeply discounted' merchandise. Another sign of weakness to come: By weekend's-end, 39.3% of shoppers said they had completed a greater portion of their holiday shopping, up from 36.4% last year. Online sales were up just 1%.
• Citi drives a hard bargain. Citigroup's (C) infrastructure fund, Citi Infrastructure Partners, agreed to buy troubled Spanish highway operator Itinere Infraestructuras from Sacyr Vallehermoso for €7.9B - €2.9B in cash and assumed debt of €5B. Sacyr, Spain's fifth-largest construction company, fell into uncertainty after taking on €16.5B in debt - more than seven times its market cap - in an effort to expand in energy and counter a slump in domestic construction, forcing the sale. Analysts say Sacyr sold out of desperation, and got the short end of the stick. Citigroup is up 12% in premarket trading.
• Redstone finds Midway buyer. Sumner Redstone's holding company, National Amusements, will announce today it is selling its 87% stake in Midway Games (MWY) to investor Mark Thomas for $100,000 and the assumption of $70M in debt. National Amusements is in negotiations with banks to restructure its $1.6B debt burden after recently breaching one of its debt covenants; the sale is expected to ease pressure on the family. The holding company will take an $800M+ loss on the sale, which will reduce its 2008 taxable income and entitle it to a refund of amounts paid in previous years. Redstone has already sold $233M of his holdings in Viacom (VIA) and CBS Corp. (CBS) to help resolve debt issues, and has vowed not to sell any more of his stake in the pair.
• Microsoft pursuing Yahoo's search business? Shares of Yahoo (YHOO) are up 18% premarket on a report Microsoft (MSFT) is in talks to acquire its online search business for $20B. In an interview published this weekend by Barron's magazine, Yahoo board member and major stakeholder Carl Icahn said Microsoft "has said publicly that they are not interested in buying the whole company, and I believe them. But they are interested in doing a deal on search, and we should pursue that." But a key player says the report is total fiction.
• Slippery slope? Analysts say that despite OPEC's publicly-stated support of oil at around $75/barrel, the cartel is not cutting production fast enough to address the current drop in demand - hence oil's 67% plunge from July's highs. On Saturday, OPEC concluded its Cairo conference without cutting output, but did note cartel members are adhering to their quotas. OPEC accounts for 40% of the world's total oil output. While member nations appreciate the value of higher-priced oil, OPEC has in the past struggled to hold them to quotas and forgo additional sales. Merrill Lynch forecasts crude at $43/barrel in Q1 2009. Last time OPEC failed to eliminate a supply glut, in 1998, crude bottomed at $10.35. Crude fell 4.7% to $51.90 in overnight trading.
• Pound slides on weak manufacturing, housing data. U.K. manufacturing shrank at the fastest pace in at least 16 years in November, increasing pressure on the BoE to slash interest rates again this week. The Chartered Institute of Purchasing and Supply’s factory index dropped to 34.4, the weakest since the data began in 1992. Meanwhile the average cost of a home in England fell 8.1% during the past year to £161,400. The pound was pounded, falling 2.25% in overnight trading on expectations of a full-point cut to the BoE's five-decade low 3% target rate.

Today's Markets

• Asia markets were mixed Monday. Japan's Nikkei fell 1.35% to 8,397. Hang Seng +1.59% to 14,109. Shanghai +1.25% to 1,895. BSE Sensex -2.78% to 8,840.
• In Europe, markets are near their lows at midday. London -2.5%. Paris -2.5%. Frankfurt -3.2%.
• U.S. futures indicate a weak open to the week. Dow -1.8% to 8664. S&P -2.3% to 875. Nasdaq -2.1%. Crude -4.2% to $52.15. Gold -3.15% to $790.50.

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While media will tilt their camera lenses toward retail shopping on Black Friday to kick off the beginning of the Christmas holiday and the deep seasonal price tag discounts, you might actually witness better bargains in this stock market that will have lasting benefits long after the gift wrapping finds itself crumpled in the trash can and the discarded remnants of decorated evergreen trees litter the yard.

It was recently reported that nearly 20% of the S&P 500 was comprised of stocks trading below $10.00 per share. That is incredible to think how far and how fast this market has declined in a matter of months. It’s no big secret at this point that the market has been oversold and we continue to be in the process of formulating a bottom. There is tremendous value in the markets across all sectors as long as you don’t believe we are headed into financial Armageddon, in which case, no one profits up or down from a disastrous doomsday scenario.

Q3 2008 Earnings Call

November 10, 2008 at 4:30 pm ET

Media mogul Sumner Redstone is embroiled in his own credit crisis brought on by the market’s savage sell-off.

Redstone’s National Amusements, which is privately held and controlled by the Redstone family, is scrambling to renegotiate a $1.6 billion loan – $800 million of which is due for repayment by mid-December.

Q2 2008 Earnings Call

August 4, 2008 4:30 pm ET

Midway Games Inc. (MWY)

Q1 2008 Earnings Call Transcript

On March 6, after the close of trading Midway Games Inc. (MWY) announced its 4Q`07 financial results (see conference call transcript). Despite an extremely favorable sales environment for videogame software during the holidays, and the fact Midway was in the market with an array of new titles, the overall scope of the quarterly report was inadequate. On a non-GAAP basis, the company reported a loss per share of $0.25 (consensus loss per share $0.22). Net revenues declined 19.91% year over year to $77.6 million (consensus $80.8 million).

Midway Games Inc. (MWY)

Q4 2007 Earnings Call

As an investor in video game stocks, I'm beginning to worry that consolidation will remove pure-play opportunities for trading in my favorite sector. Activision (ATVI) got bought (sort of) by Vivendi, and now Take-Two (TTWO) is probably going the way of Electronic Arts (ERTS). The TTWO buyout is not all that surprising--I first speculated ERTS would take them over back in December. Lucky guess - even an amateur surfer catches a wave now and then. But the question now is what to do with an industry that's changing rapidly.

1. AT&T (T) may be more inclined to deal for EchoStar's (DISH) after yesterday's spin-off, because a pre-spinoff deal would have triggered a hefty tax payment. [The new company, EchoStar Holding (SATS), holds the technology and satellite-infrastructure assets. Shares soared 73% Wednesday.]
2. Shares of Jackson Hewitt Tax Services (JTX) dropped 14.4% after the IRS said it may ban tax preparers from offering customers refund loans and audit insurance, which may ecourage tax fraud. H&R Block (HRB) is off 3.7%.
3. VMWare (VMW) jumped suddenly at 1:00 PM on rumors of a large contract win.
4. Slowing earnings growth in important sectors, high valuation and weak performance may derail a Chinese stock market boom in which companies earn a significant portion of their profits from stock market gains.
5. Despite a Bear Stearns note to the contrary, Rupert Murdoch's (NWS) plan to free up the Wall Street journal adds up.
6. Midway Games (MWY) is considering a merger with with SCi/Eidos. Midway's brands include Mortal Kombat, Unreal Tournament and Stranglehold. SCi owns Hitman and Tomb Raider.
7. After a recent price drop, NAND flash memory prices appear to be settling. January demand seems solid.
8. Evergreen Solar (ESLR) is up 4% on rumors of a GE (GE) takeover. This has been rumored in the past.
9. GM (GM) will not be able to build enough new Chevrolet Malibus to meet demand before the spring. Analysts say this is a good problem for GM, which looks to draw customers from Toyota's (TM) Camry and Honda's (HMC) Accord.
10. Specialty stores such as True Religion (TRLG) saw no evidence of a consumer slowdown this holiday season.
11. Polo Ralph Lauren (RL) shares are up 2% on chatter Warren Buffett has taken a stake in the company.
12. Plaxo, an early social networking site with per-visit numbers comparable to Facebook, is for sale. Some say it could fetch upwards of $100M, which has others wondering why it's using relative unknown Revolution Partners as an advisor, and not one of the big boys.
13. Countrywide (CFC) is cutting 127 jobs in Illinois. The company is under investigation by the Illinois AG for predatory and possibly fraudulent lending practices.
14. There are rumors Yingli Green Energy (YGE) won a Turkish government contract. Yesterday, YGE was named Collins Stewart's top pick for 2008, which says YGE trades at a significant discount to peers despite competitive advantages.
15. The next buyout to fall through could be Reddy Ice (FRZ), due to the deal's low $21M reverse termination fee.
16. AIG (AIG) is in the lead to acquire National Grid's (NGG) £700M mixed use and residential portfolio, a move that would increase AIG's UK property and infrastructure holdings significantly.
17. Rapper Jay-Z may launch a record label with Apple (AAPL).